The law of supply and demand is the ABCs of economics, but the demand side of the equation has been ignored when people talk about falling oil prices. Some pundits think oil will drop as low as the $60s. This may be good news for retailers and restaurants, because the less consumers spend on gas, the more they can spend in the malls or for a meal, but it has been terrible for oil producers, who have seen their stocks crater in recent months.
Oil refiners, like Marathon Petroleum, benefit from lower prices of oil, because for refiners, oil is a raw material. However, Marathon CEO Gary Heminger told Jim Cramer on Mad Money that oil prices shouldn’t approach the $60 range, because at some point, if gas is cheap enough, people will drive more. Heminger reports he has already seen demand pick up as oil prices fall. He thinks that people will drive more, take road trips, stop commuting by mass transit and will buy more SUVs, encouraged by low prices at the pump.
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Heminger said talk of an oil glut is greatly exaggerated, and the U.S. still imports a large amount of its oil. It is the slowdown in demand, not excess supply, that has been keeping prices down, but according to Heminger, demand has been picking up and prices will soon rise.